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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI A. K. GARODIA & SHRI VIJAY PAL RAO
1.That the order passed by the Learned Commissioner of Income Tax (Appeals) - IV, Bangalore CCIT (An, to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
2. That the learned CIT(A) erred in upholding the rejection of the Transfer Pricing CTP') documentation by the Learned Transfer Pricing Officer CTPO')/ Assessing Officer CAO') and in making an adjustment to the transfer price of the Appellant in respect of its IT enabled support services in the nature of back office and customer support services
3. That on the facts and In the circumstances of the case, the learned CIT(A) while making adjustment, erred in;
(a) Upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis performed by the learned TPO in the TP Order.
(b) Disregarding application of multiple year/
3 IT(TP)A Nos.1363 & 1460(B)/2014 prior year data as used by the Appellant in the TP documentation and holding that current year 2008-09) (i.e. Financial Year data for companies should be used for comparability.
(c) Upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm's length price.
(d) Arbitrarily arriving at a set of companies as comparable to the IT enabled support services of the Appellant, on rejecting companies that are otherwise functionally comparable to the Appellant and on inclusion of companies that otherwise fail the test of comparability.
4. The learned CIT(A) erred in ignoring the low risk nature of the services provided by the Appellant and in not providing an appropriate adjustment under Rule 10B of the Income-tax Rules, 1962 towards the risk differential, even when full-fledged entrepreneurial companies are selected as comparables.
5.The learned CIT(A) erred in not considering the income from services in the nature of interest on the delayed payments made by associated enterprises for the provision of IT enabled
4 IT(TP)A Nos.1363 & 1460(B)/2014 services as an operating income and hence erred in computing the effective mark-up on total cost earned by the Appellant.
The revenue has raised the following grounds in its appeal for the assessment year 2009-10:-
“1.The order of the Learned CIT (Appeals) is opposed to law and the facts and circumstances of the case.
2. The CIT(A) erred in law as well as on facts in holding that as the working capital adjustments provided by the TPO has negative impact on adjusted margin, the assessee is entitled to 4risk adjustment as per prevailing norms, which shall be worked out by the TPO and granted to the assessee without appreciating that risk adjustment could not be allowed in the absence of specific difference in risk and its impact on profit margin and the TP regulations in India are against making any assumptions in respect of any adjustments and such risk adjustment cannot be provided without making necessary assumptions.
3. The CIT(A) erred in directing the AO to follow the ratio laid down by the Hon’ble High Court in the case of Tata Elxsi Ltd. 349 ITR 98 while computing the deduction u/s 10A by 5 IT(TP)A Nos.1363 & 1460(B)/2014
excluding the certain expenses from the total turnover also, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause(iv) of the explanation to sec.10A provides that such expenses are to be educed only from the export turnover.
4. The Ld.CIT(A) erred in not appreciating the fact that the jurisdictional High Court’s decision in the case of Tata Elxsi Ltd. 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon’ble Supreme Court
6. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the AO be restored.
7. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal”.
First we take up the appeal of the assessee. It is submitted by the ld. AR of the assessee that only ground no.3d and ground no.5 are to be decided and other grounds are general in nature.
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Regarding ground no.3d, he submitted that the order of the ld.
CIT(A) is very cryptic and without any reasoning and therefore, the matter regarding TP issue may be restored back to the file of the ld. CIT(A) fort fresh decision.
Regarding ground no.5, he submitted that this issue was raised before the ld. CIT(A) as per ground no.11 which can be seen at page-157 of the paper book. He submitted that the interest received from AE on account of delayed payment by the AE should be considered as operating profit. At this juncture, it was pointed out by the Bench that if the assessee is having more debtors then, there may be a case for working out capital adjustment but how the interest income can be considered as operating profit. In reply, the ld. AR of the assessee had nothing to say.
As against this the ld. DR of the revenue supported the order of the authorities below. He also submitted that working capital adjustment was already allowed by the TPO and therefore, there is no case for considering the interest income as operating profit.
We have considered the rival submissions. Regarding the ground no.3d, we find that this issue has been decided by the ld. CIT(A) as per para-7.2.5 and 7.2.6 of his order which are reproduced below for the sake of ready reference.
“7.2.5 In the light of the aforesaid reasoning, functionality of all the comparables are examined as under:-
7 IT(TP)A Nos.1363 & 1460(B)/2014 Sl.N Company Name Function o 1 Accentia Technology Ltd. It offers service and solutions for healthcare receivables cycle management and software products for business process outsourcing. 2 Aditya Birla Minacs Customer support Worldwide Ltd. services, procurement solution, financial solutions, customer support services, information management and infrastructure management. 3 Allsec Technologies Ltd Provider of outsourced solutions in customer engagement, sale & retention and quality assurance for business. 4 Cosmic Global Ltd. Provides translation services, localization and DTP services, transcription outsourcing business, accounting operations. 5 Eclerx Services Ltd Data content management, data analysis and process improvement task, trade support and validations, settlements and clearing, asset servicing, risk adjustment and reconciliation. 6 Informed Technologies Ltd. Development &
8 IT(TP)A Nos.1363 & 1460(B)/2014 assessment of telecommunication, net work
7 Infosys BPO Limited Business platforms, customer service outsourcing, finance and accounting, human resource, outsourcing, legal process outsourcing 8 Microland Ltd Infrastructure management and modernization, end user services, cloud computing, collaboration and mobility.
7.2.6 In view of the aforesaid, I see no reason to exclude any further comparables on the ground of functional dissimilarity, as the business of the comparables vis-avis the assessee company falls within the same sector. Thus, the 08 comparables mentioned above shall form the final comparables on which the ALP adjustment needs to be carried out by the TPO. It is ordered accordingly”.
From the above paras re-produced from the order of the ld.
CIT(A), it is seen that his order on TP issue is very cryptic and not a speaking and reasoned order. Therefore, We feel it proper to restore the matter regarding TP issue to his file for a fresh decision. We order accordingly. The TP issue is restored back to his file with a direction that he should pass a speaking and reasoned order after affording adequate opportunity of being heard to both sides. Ground no.3d is allowed for statistical purposes.
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Regarding ground no.5, we find that this issue was decided by the ld. CIT(A) as per para-7.4.11 which is reproduced herein below;
“7.4.11 Applying the aforesaid judicial authorities to the instant case, it is very clear that the interest income earned from debts has no nexus whatsoever with the business activity of the assessee which is export of software development services only. It is a matter of fact that the assessee has chosen to treat this income as other income in its financial statements. But however, at the time of preparing the TP study, it has chosen to include it as an ‘operational income’. On account of the reasoning various judicial platforms as narrated above which can be legitimately applied to interpret the term ‘operational income’ vis-à-vis transfer pricing law, the action of the TPO in holding such receipts to be non-operational income is justified and hereby upheld”.
From the above Para re-produced from the order of the ld.
CIT(A), it is seen that the ld. CIT(A) has decided this issue in the light of various judgments noted by him in earlier paras of his order which includes a judgment of the Hon’ble jurisdictional High Court rendered in the case of M/s Sharavathy Steel Products Ltd.Vs ITO 347 ITR 371 (Kar.). This judgment is in the context of deduction u/s 80IA of the IT Act, 1961. The ld. CIT(A) has also considered the Tribunal order of Delhi Bench rendered in the case of e-office International Pvt.Ltd. Vs DCIT as reported in 310 ITR54(AT) wherein it was held by the Tribunal that the assessee was not eligible to claim deduction u/s 10A of the IT Act, 1961
10 IT(TP)A Nos.1363 & 1460(B)/2014 on the interest income earned by the assessee from the housing loans advanced to its employees because it did not form part of the business of the assessee. Considering the facts of the present case and various judicial pronouncements followed by the ld. CIT(A) as noted by him in his order, we find no infirmity in the order of the ld. CIT(A) on this issue and since the working capital adjustment has already been allowed by the TPO, we are of the considered opinion that non interference is called for in the order of the ld.CIT(A) on this issue. Accordingly, ground no.5 of the assessee is rejected.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Now we take up the appeal of the revenue.
The ld. DR of the revenue supported the assessment order and the TPO’s order, whereas the ld.AR of the assessee supported the order of the ld. CIT(A).
Regarding ground no2 of the revenue’s appeal, the ld. DR of the revenue placed reliance on a Tribunal order of Mumbai Bench rendered in the case of M/s Exxon Mobil Company India Pvt.Ltd. Vs DCIT (15 ITR(Trib.)353.
We have considered the rival submissions. We find that this issue was decided by the ld. CIT(A) as per para-7.3.1. and 7.3.2 of his order which are re-produced below for the sake of ready reference;
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“7.3.1 I have examined the TPO’s working and find that e has provided a working capital adjustment on the issue of the detailed working as per Annexure-C of his order. Recently, the Mumbai Bench of the Hon’ble Tribunal in Exxon Mobil Company Ind. Pvt. Ltd. Vs DCIT has observed: “The other issue is grant of adjustment i.e. working capital adjustment and risk adjustment while arriving at the arm’s length price. In this case, the assessee is his transfer pricing study, has not made any working capital adjustment or risk adjustment. The AO has, in fact, granted working capital adjustment. When the assessee is confronted with the possible transfer pricing adjustment due to change of some comparables and addition of certain other comparables by the TPO, this claim of risk adjustment is made by the assessee. Though, in principle, these adjustments have to be made while arriving at arm’s length price, on the facts and circumstances of the case, as the assessee has not worked out the risk adjustment and as the AO has already allowed 0.47 per cent, as working capital adjustment, we are of the opinion that no further adjustment is necessary”.
7.3.2. On the basis of the aforesaid line of reasoning, I am of the view that once the AO/TPO has granted working capital adjustment, there is no necessary of providing any further adjustments. But, however, in the instant case, it cannot be said that the TPO has provided working capital adjustment. As a matter of fact, he/she has provided it at (-)0.91% which has 12 IT(TP)A Nos.1363 & 1460(B)/2014 increased the arm’s length mean margin on cost from 25.04% to 25.95. Before me, it was argued that the appellant is a captive service provider and assumes the less normal risks relating to business and operations and entrepreneurial risks borne by its AEs outside India and is therefore insulated from most of the business and operational risks which the comparable companies are exposed to. Therefore, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in the risks assumed are made. I have considered the facts and circumstances of the case and find that the working capital adjustment has been provided in the positive sense. Hence, the Hon’ble Tribunal’s ruling will not apply in the instant case. Therefore, in my view, the appellant is entitled to risk adjustment as per prevailing norms which shall be worked out by the TPO and granted to the appellant. It is ordered accordingly”.
We have gone through the above two paras re-produced from the order of the ld.CIT(A) in which he reproduced the findings of the Tribunal in the case of Exxon Mobil Co. India Pvt. Ltd. (Supra) on which reliance has been placed by the ld. DR of the revenue. We find that in this case, it was held by the Tribunal that in principle, this adjustment i.e. the working capital adjustment or risk adjustment had to be made while arriving at arm’s length price but considering the facts of that case where the assessee did not work out the risk adjustment but the AO has already allowed 0.47% as working capital adjustment, it was held by the 13 IT(TP)A Nos.1363 & 1460(B)/2014 Tribunal that no further adjustment is necessary. In our considered opinion, the denial of risk adjustment in that case by the Tribunal is on the basis of peculiar facts of that case where the assessee in its TP study had not made any working capital adjustment or risk adjustment but the TPO has already allowed the working capital adjustment. In the present case, the TP study undertaken by the assessee is available on pages 347 to 458 of the paper book and the assessee’s study regarding risk adjustment is available on page-374 of the paper book. For the sake of ready reference, the same is reproduced herein below;
“ Adjustment for risk 5.5.4. The IT enabled services industry can be broadly classified under two business models(a) out sourced services where risks are passed on to the service provider, and (b) out sourced services where risks are not borne by the service provider. It is relevant to understand that the business process and commercial considerations would be different for (a) and (b) By and large al the Indian IT enabled service providers would come under the (a) category and captive IT enabled centres set by Multi National Corporations would come under (b) category. The business attributable and commercial parameters on which each of the above categories operates are provided in Table-4.
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Table-4 Difference in functions performed India IT Enabled Captive IT Enabled Service Companies Service Companies Responsible for providing Operate on a shared service services to the satisfaction concept being located at low of the client cost centre. Primarily leverage on the technology infrastructure of the location with support of quality local manpower.
Revenue models are Operate on a profit centre generally cost plus. Does not model and thus tasks all take any entrepreneurial entrepreneurial and liability and associated business risks with risks as parent compensates extensive marketing efforts. for all costs. No marketing element involved.
5.5.5. In the light of the above given factors, and the industry and functional analysis it is apparent that the risk assumed by the uncontrolled comparable companies are significantly high. The typical risks borne by these companies include market risk, product risk technology risk, risk of project cost overruns, financial risk and entrepreneurial risk apart from the economic and political risks. However, MACH Teledata being a captive IT enabled service provider has an assured return revenue model, with minimal risk factor. Hence, an adjustment with regard to the risk premia earned by the uncontrolled comparable companies becomes imperative. MACH Teledata has retained the option to make the said adjustment”.
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From the above paras in the TP study, it is seen that although, contention are raised regarding risk adjustment but the working is not provided and it is finally stated that the assessee has retained the option to make the said adjustment. Hence, it is seen that in the present case also, working of risk adjustment claimed by the assessee is not available in the TP study and is not made available before the TPO or before the ld. CITA) or before us. This is also true that apart from various risk faced by uncontrollable comparables, the assessee providing services to AE is also having risk of single customer and therefore, in the absence of any scientific working in respect of the claim for risk adjustment, the same cannot be considered and allowed and therefore, we are of the considered opinion that the ld. CIT(A) was not justified in holding that the assessee is entitled to risk adjustment as per prevailing norms which shall be worked out by the TPO and granted to the assessee. If such adjustment was possible to be worked out in the facts of the present case, the ld CIT(A) should have worked out himself instead of asking the TPO to work it out. Such working is not made available before us also by the ld.AR of the asseeeee and therefore, we reverse the order of the ld. CIT(A) on this issue and restore the order of the AO.
Accordingly, ground no.2 of the revenue is allowed.
Regarding the issue involved in ground no.3 & 4 of revenue’s appeal, we find that this issue is fully covered in favour of the assessee by the judgment of the Hon’ble Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd. (Supra) wherein it was held that Total
16 IT(TP)A Nos.1363 & 1460(B)/2014 Turnover is sum total of Export Turnover and Domestic Turnover and therefore, if an amount is reduced from export turnover then total turnover also goes down by the same amount automatically.
Respectfully following this judgment, we decline to interfere in the order of CIT (A) on this issue. Accordingly, ground no.3 & 4 of the revenue’s appeal are rejected.
In the result, the appeal of the revenue is partly allowed.
In the combined result, the appeal of the assessee is partly allowed for statistical purposes whereas the revenue’s appeal is partly allowed.
Order pronounced in the open court on the date mentioned on the caption page.